Solekia Limited FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥14.07B
• Operating Income: ¥956M
• Net Income: ¥620M
• EPS: ¥717.98

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: Strong topline and operating leverage drove a very solid FY2026 Q2, but cash conversion deteriorated materially. Revenue grew 9.8% YoY to 140.7, while operating income rose 56.1% YoY to 9.56, evidencing robust operating leverage. Gross profit reached 28.33 with a gross margin of 20.1%, supported by cost discipline against a rising topline. SG&A was 18.76, implying a SG&A-to-sales ratio of 13.3%, which left ample room for operating margin expansion. Operating margin improved to 6.8% from roughly 4.8% a year ago, a ~200 bps expansion. Ordinary income climbed 60.8% YoY to 9.65, with minimal reliance on non-operating factors (non-operating income 0.30 vs expenses 0.22). Net income increased 61.1% YoY to 6.20, with an effective tax rate of 35.7%. EPS (basic) printed at 717.98 yen, with average shares of 863,987. Balance sheet quality remains strong with cash and deposits at 106.36 and a current ratio of 242.7%. Leverage is conservative on a net basis given substantial cash relative to loans (short-term 11.30 and long-term 18.50). However, earnings quality is a key concern: operating cash flow was -4.04, yielding OCF/Net Income of -0.65x, well below the >1.0x high-quality benchmark. The negative OCF suggests working capital consumption (likely receivables growth tied to higher sales and/or project timing), which bears monitoring. Capital intensity remains low with D&A of 0.39 and capex of 0.47, supporting structurally strong returns (ROIC reported at 15.0%). With a calculated ROE of 5.3%, there is room for further enhancement if cash conversion normalizes. Looking forward, sustaining margin gains while improving cash conversion will be critical for dividend capacity and reinvestment optionality.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = 4.4% × 0.607 × 1.97x ≈ 5.3%. The biggest driver of improvement this quarter appears to be Net Profit Margin, as operating income grew 56.1% on just 9.8% revenue growth, indicating stronger operating leverage and cost control. Operating margin expanded about 200 bps YoY (from ~4.8% to 6.8%), while non-operating effects were small (net +0.08). Asset turnover at 0.607 is moderate and likely stable given the business model and sizeable cash holdings. Financial leverage at 1.97x (based on assets/equity) is not excessive, and net of cash, economic leverage is even lower. Business reasons for margin expansion likely include mix improvements, better project execution, and SG&A discipline (current SG&A ratio 13.3%); cost of sales discipline also supported gross margin at 20.1%. Sustainability: margin gains appear operational rather than one-off, but may be partly cyclical given project timing and revenue mix; preserving gross margin and avoiding SG&A creep will be essential. Watch for potential pressures from wage inflation or subcontracting costs that could compress gross margin. No sign that SG&A growth exceeded revenue this quarter (SG&A ratio is reasonable), but YoY SG&A growth not disclosed limits a full operating leverage assessment.

Growth Assessment

Revenue growth of +9.8% YoY to 140.7 indicates healthy demand momentum. Operating profit growth of +56.1% YoY far outpaced sales, implying favorable mix and execution. Non-operating items were minor (non-op income 0.30 vs expenses 0.22), suggesting core operations drove the performance rather than one-time gains. Gross margin at 20.1% and operating margin at 6.8% mark clear improvements versus last year’s implied levels. EBITDA of 9.95 (7.1% margin) and interest coverage at 49.8x highlight strong earnings capacity relative to financing costs. Reported ROIC of 15.0% is excellent versus a 7–8% benchmark, implying value-accretive deployment of capital. However, negative OCF (-4.04) offsets some of the earnings strength and raises questions on the durability of growth absent better working capital management. With limited disclosure on segment mix and order backlog, sustainability is assumed but not verified; caution is warranted if growth is concentrated in a few large projects with back-ended cash inflows. Near-term outlook: if current margin discipline persists and receivables normalize, mid-single-digit operating margins look defensible; cash conversion improvement is the key swing factor.

Financial Health

Liquidity is strong: current ratio 242.7% and quick ratio 242.7%, with cash and deposits of 106.36 comfortably exceeding short-term loans (11.30) and supporting day-to-day needs. No warning triggers (Current Ratio well above 1.0). Solvency: total liabilities/equity is 0.97x; interest-bearing debt totals 29.80 (short-term 11.30 + long-term 18.50) versus sizeable cash, implying net cash of roughly 76.6 and low effective leverage. D/E is below the 1.5x conservative benchmark; no D/E > 2.0 warning. Maturity mismatch risk is low given current assets of 208.36 against current liabilities of 85.85. Off-balance sheet obligations are not disclosed; no explicit guarantees or contingent liabilities reported in the provided data. Overall, the balance sheet provides flexibility to navigate working capital swings.

Cash Flow Quality

OCF was -4.04 versus net income of 6.20, yielding an OCF/NI ratio of -0.65x, which flags a quality concern relative to the >1.0x benchmark. The shortfall likely stems from working capital consumption (e.g., higher accounts receivable aligned with sales growth and project timing); detailed working capital movements were not disclosed. Capex was modest at 0.47, consistent with a capital-light profile. Free cash flow cannot be calculated precisely due to partial disclosure, but directionally FCF was likely negative given negative OCF and positive capex. Financing CF of +6.43 suggests reliance on financing inflows (possibly debt draw or other) to offset the operating cash deficit, which is not ideal if sustained. No overt signs of manipulation can be confirmed or dismissed without detailed working capital schedules; however, a divergence of this magnitude should normalize in subsequent periods to alleviate concerns.

Dividend Sustainability

The calculated payout ratio is low at 9.1%, indicating ample coverage from accounting earnings under normal conditions. However, with OCF negative this quarter, cash coverage of dividends is less certain near term. FCF coverage cannot be computed with the available data; given negative OCF and positive capex, near-term FCF was likely negative. Balance sheet cash (106.36) provides a buffer that could support dividends temporarily without stressing liquidity. Absent disclosed DPS or dividend policy, we assume a conservative approach aligned with earnings and cash conversion; sustainability will hinge on OCF normalization over the next quarters.

Risk Assessment

Business Risks:

• Project timing and revenue recognition risk leading to volatile quarterly margins and cash flows
• Cost inflation in subcontracting and labor potentially pressuring gross margin
• Customer concentration risk (not disclosed) could amplify earnings volatility
• Execution risk on larger projects affecting working capital and profitability

Financial Risks:

• Negative OCF despite strong profit (OCF/NI -0.65x) indicating working capital strain
• Potential reliance on financing inflows (+6.43) to bridge operating cash deficits if sustained
• Receivables collection risk given sales growth and accounts receivable balance (59.74)

Key Concerns:

• Earnings quality flagged by OCF deficit versus net income
• Sustainability of ~200 bps operating margin expansion without SG&A and COGS detail
• Limited disclosure on investing CF and dividend payments obscures cash commitments

Investment Implications

Key Takeaways:

• Strong operational quarter: revenue +9.8% YoY, operating income +56.1% YoY
• Operating margin expanded about 200 bps YoY to 6.8% on disciplined costs
• Earnings quality concern: OCF/NI -0.65x due to working capital consumption
• Balance sheet resilience with net cash position and current ratio 243%
• ROIC at 15% suggests high-return core operations if cash conversion normalizes

Metrics to Watch:

• OCF/Net income and working capital turns (DSO, payables days) next quarter
• Gross margin stability versus subcontracting and wage cost trends
• SG&A-to-sales ratio to confirm operating leverage persistence
• Receivables balance relative to sales and any allowance movements
• Capex and investment CF to ensure ROIC remains >8%

Relative Positioning: Relative to peers in systems/IT services and project-based businesses, Solacia shows stronger margin momentum and a fortified liquidity profile but lags on cash conversion this quarter; if OCF normalizes, profitability and ROIC position the company in the upper tier of efficiency.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis